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Rochester Business Journal

December 7, 2012

Perhaps more than any factor, the stability of Rochester's real estate market has helped the local economy to outperform many other metropolitan areas in the recovery from the Great Recession. The latest Zillow Negative Equity Report shows that Rochester continues to stand apart, to its advantage.

In the three months ended Sept. 30, home values nationwide had the biggest quarterly gain since 2006. As a result, underwater mortgages declined-from nearly 31 percent of homes with a mortgage in the preceding quarter to 28.2 percent.

In metro Rochester, however, the figure was 11.5 percent, down from 13.2 percent three months earlier. The third-quarter number was the lowest negative equity rate here since 2010.

In addition to being less than half of the national average, Rochester's rate is lower than any of the 30 largest U.S. metro regions, which include Atlanta (50.4 percent), Phoenix (45.5 percent) and Las Vegas (63 percent).

More than a few economists think the Obama administration's biggest mistake in managing the recovery has been doing too little to reduce the mortgage debt overhang.

"Negative equity appears to be a bigger problem than economists had realized," said Christina Romer, the president's former top economic adviser, in a December 2011 speech.

The administration's chief housing focus as the economy turned around was preventing foreclosures; since relatively few underwater mortgages result in foreclosure, tackling negative equity was not a policy priority.

But as Ms. Romer explained, research now shows that household debt-which is predominantly mortgage debt-has a major chilling effect on consumer spending. "(This) suggests that policy may need to be more focused on reducing principal on troubled mortgages," she said.

As noted here more than a year ago, economist Martin Feldstein has outlined an interesting proposal: a voluntary program in which government and lenders agree to split the cost of reducing mortgages to 110 percent of the homes' values. But there's no shortage of ideas.

What's lacking is the necessary focus-and political will-to deal with the mortgage debt overhang. And unfortunately, with the fiscal cliff looming, that's unlikely to change anytime soon.